Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk'. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Matrix Service Company (NASDAQ:MTRX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Matrix Service Carry?
The image below, which you can click on for greater detail, shows that at September 2019 Matrix Service had debt of US$11.4m, up from US$1.55m in one year. But on the other hand it also has US$139.9m in cash, leading to a US$128.5m net cash position.
A Look At Matrix Service's Liabilities
The latest balance sheet data shows that Matrix Service had liabilities of US$285.3m due within a year, and liabilities of US$30.0m falling due after that. Offsetting these obligations, it had cash of US$139.9m as well as receivables valued at US$281.9m due within 12 months. So it actually has US$106.5m more liquid assets than total liabilities.
This surplus suggests that Matrix Service is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Matrix Service has more cash than debt is arguably a good indication that it can manage its debt safely.
Better yet, Matrix Service grew its EBIT by 1740% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Matrix Service's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Matrix Service has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Matrix Service actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While we empathize with investors who find debt concerning, you should keep in mind that Matrix Service has net cash of US$128.5m, as well as more liquid assets than liabilities. The cherry on top was that in converted 278% of that EBIT to free cash flow, bringing in US$63m. When it comes to Matrix Service's debt, we sufficiently relaxed that our mind turns to the jacuzzi. Another factor that would give us confidence in Matrix Service would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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